What is a transaction at an undervalue?
A transaction at an undervalue (referred to as s238 of The Insolvency Act 1986) is when business assets are sold lower than their true value or for a loss.
Transactions at an undervalue within a company that later becomes insolvent can result in serious repercussions for company directors. This is because it may be viewed as deliberately diverting assets away from the company’s creditors (i.e. the companies/people it owes money to).
Types of transactions at an undervalue
There a few different instances where transactions at an undervalue can occur:
- If a director ‘gifts’ assets to someone connected to the company and does not receive payment in return. This could be a family member or another director of the company.
- If a director ‘gifts’ assets to an independent third party and does not receive payment in return.
- If an asset is sold for a reduced sum, way below its true market value.
Uncovering transactions at an undervalue
If a company enters into administration or liquidation, one of the duties of the appointed Insolvency Practitioner is to identify whether any transactions at an undervalue have been carried out. The Insolvency Practitioner will look at the insolvent company’s books & records, asset register and other financial documentation. By analysing these, the Insolvency Practitioner will be able to identify any ambiguous or questionable transactions. Further investigation will be necessary if transactions at an undervalue could have contributed to the company’s decline, or if they occurred once the company was insolvency.
To ensure directors do not inadvertently undertake transactions at an undervalue you should have the asset professionally valued to ensure that a fair price is achieved. Once the sale has been completed, the money should be deposited into the company bank account as soon as possible. Financial records should always be kept organised.
The consequences for company directors
Company directors who have carried out transactions at an undervalue could face:
- Disqualification as a director for 2-15 years
- Personal liability for some or all of the company’s debts
- criminal prosecution and a potential prison sentence (if serious unlawful conduct is established)
The appointed administrator or Insolvency Practitioner can also apply to the court to have the transactions at an undervalue reversed; usually if they occurred within the last 2 years.
How we can help you
If you have any questions regarding transactions at undervalue or any insolvency-related matter, contact us for your free and confidential advice.
Clarke Bell are Licensed Insolvency Practitioners and have been trading since 1994. We are experts in dealing with all types of business insolvency issues, so you can be sure that you will get the best, professional advice for your situation.